As if the U.S. tax code was not complicated enough already, a couple of weeks ago, presidential candidate Sen. Bernie Sanders proposed a new version of his wealth tax. Sanders’ tax plan, which is posted on his website berniesanders.com, provides many details of his proposed wealth tax, but it provides few, if any, details on which assets would be subject to the wealth tax. Maybe some assets. Maybe all. The devil is in the details, of course.

To fill in the details on which assets might or might not be covered by a wealth tax, we can look to the experience of several European countries to see how their wealth tax devils have played out. According to the extensive 2018 report “The Role and Design of Net Wealth Taxes in the OECD,” by OECD tax economist Sarah Perret, “the scope of wealth taxes varies across countries. Both income and non-income generating assets are typically taxed under a net wealth tax. They can include land, real estate, bank accounts, bonds, shares (stocks), investment funds, life insurance policies, vehicles, boats, aircraft, jewelry, art and antiques, (and) intellectual or industrial property rights.”

Sanders’ tax plan is dedicated to noble causes, as the revenue raised “would be used to fund Bernie’s affordable housing plan, universal childcare and would help fund Medicare for All.” Despite his hyperbole and, at times, monotonous fixation on income and wealth inequality, he also cites compelling and well-documented justifications for a wealth tax. As posted on berniesanders.com, “Over the last 30 years, the top 1% has seen a $21 trillion increase in its wealth, while the bottom half of American society has actually lost $900 billion in wealth. In other words, there has been a massive transfer of wealth from those who have too little to those who have too much.” Still, his proposed tax on extreme wealth seems a bit extreme in itself, as “under this plan, the wealth of billionaires would be cut in half over 15 years which would substantially break up the concentration of wealth and power of this small privileged class.”

Likewise, presidential candidate Sen. Elizabeth Warren has proposed a similar wealth tax, although Sanders’ plan goes a few steps further than hers, especially with the tax brackets.

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Sanders’ plan:

¯ under $32 million: no tax

¯ $32-50 million: 1%

¯ $50-250 million: 2%

¯ $250-500 million: 3%

¯ $500 million to $1 billion: 4%

¯ $1-$2.5 billion: 5%

¯ $2.5-$5 billion: 6%

¯ $5-$10 billion: 7%

¯ Over $10 billion: 8%.

Sanders’ rates apply to married couples. Net worth is halved for singles. For example, a single tax filer would pay wealth taxes on net worth above $16 million.

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Warren’s plan:

¯ Under $50 million: no tax

¯ $50 million to $1 billion: 2%

¯ Over $1 billion: 3%

Warren’s rates apply to households regardless of whether the filer is married or single.

Depending on your perspective, you might find Sanders’ and Warren’s plans as appealing or appalling. Either way, a wealth tax is likely to be unhealthy, un-wealthy and unwise.

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Unhealthy economic distortions

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An interesting twist to Warren’s plan is married couples could significantly reduce their wealth taxes by divorcing. CNBC reporter Robert Frank reported that Elizabeth Warren’s wealth tax could include a $1 million marriage penalty. “Harvard economist N. Gregory Mankiw said (some) ultra-wealthy couples could split their fortunes in half through divorce and avoid paying any tax,” Frank noted. Mankiw cited an example where, under Warren’s plan, a married couple with a net worth of $100 million would owe $1 million per year in wealth taxes, but if they divorced and split their assets 50/50, then each would only be worth $50 million and neither would owe any wealth taxes.

Don’t consider getting divorced to escape wealth taxes under Sanders’ plan, though, because the tax brackets are cut in half for singles. For a single person, Sanders’ wealth tax would be assessed on net worth above $16 million. Both Sanders’ and Warren’s tax brackets might seem reasonable until some of the nitty-gritty details are considered, such as whether the value of a business would or would not be included in one’s net worth. If so, then parts or all of a business might need to be sold just to pay the tax bill, especially for businesses that are asset rich and cash poor. Again, the devil is in the details.

Several other economic distortions are characteristic of wealth taxes including: (1) discouraging saving and wealth accumulation, (2) encouraging dis-saving (selling assets to increase consumption), and (3) reducing entrepreneurship (formation of new businesses) and risk-taking. To encourage entrepreneurship, Perret suggests an income tax is preferable to a wealth tax, especially for cash-strapped new businesses.

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Un-wealthy

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To avoid paying wealth taxes, the wealthy have several ways of appearing to be un-wealthy. Perret notes, “tax avoidance and evasion behaviours have also been widespread in all countries. Experiences confirm the difficulties involved in taxing net wealth on a recurrent (annual) basis.” Those avoidance and evasion schemes include: (1) holding assets in trusts, (2) holding assets in businesses that are exempt from wealth taxes, (3) hiding assets abroad, and (4) non-disclosure and underreporting. According to Perret, “some forms of wealth are difficult to value or can easily be hidden from tax authorities and the capacity of tax authorities to check non-disclosure and underreporting is limited. Typical examples include household goods, vehicles, jewelry, artwork, etc. Relying on self-reporting also makes non-disclosure or underreporting more likely.”

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Unwise

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Given the European experience, wealth taxes appear to be economically unhealthy, un-wealthy and unwise. Of the 12 European countries that had wealth taxes in 1990, eight have repealed them. Perret’s report notes, “there is a strong case for addressing wealth inequality through the tax system (but) from both an efficiency and equity perspective, there are limited arguments for having a net wealth tax on top of a broad-based personal capital income taxes and well-designed inheritance and gift taxes.” A wealth tax would unnecessarily complicate an already overly complicated U.S. tax code and would be akin to closing the barn door after the horse has bolted. Rather than creating a costly, bureaucratic nightmare to administer a new wealth tax, income and inheritance taxes should be bolstered to reduce income and wealth inequality.